Your broker mailed you your year-end statement. You have $25,000 invested in Dow Chemical, $18,000 tied up in GM, $36,000 in Microsoft stock, and $11,000 in Nike. The betas for each of your stocks are 1.55 for Dow, 1.12 for GM, 2.39 for Microsoft, and .76 for Nike. What is the beta of your portfolio?
A) 1.46
B) 1.70
C) 2.60
D) 0.41
You are considering a portfolio of three stocks with 30% of your money invested in company X, 45% of your money invested in company Y, and 25% of your money invested in company Z. If the betas for each stock are 1.22 for company X, 1.46 for company Y, and 1.03 for company Z, what is the portfolio beta?
A) 1.24
B) 1.00
C) 1.28
D) 1.33
Beta is a measurement of the relationship between a security's returns and the general market's returns.
Answer: TRUE
Total risk equals unique security risk times systematic risk.
Answer: FALSE
The CAPM designates the risk-return tradeoff existing in the market, where risk is defined in terms of beta.
Answer: TRUE
It is impossible to eliminate all risk through diversification.
Answer: TRUE
Stocks with higher betas are usually more stable than stocks with lower betas.
Answer: FALSE
A stock with a beta of 1.0 would on average earn the risk-free rate.
Answer: FALSE
Unsystematic risk can be eliminated through diversification.
Answer: TRUE
Increasing a portfolio from 2 stocks to 4 stocks will reduce risk more than increasing a portfolio from 10 stocks to 12 stocks.
Answer: FALSE
The market rewards assuming additional unsystematic risk with additional returns.
Answer: FALSE
On average, the market rewards assuming additional systematic risk with additional returns.
Answer: TRUE
Betas for individual stocks tend to be stable.
Answer: FALSE
A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a beta of 1.0.
Answer: FALSE
